Morning Report: 4 June 2018

June 4, 2018

GBP. Sterling gained on the dollar last week, with a surge on Friday as it topped the G10 currency board. With little headline news over the weekend, apart from The Sunday Times reporting that Whitehall officials have drawn up contingency plans for various Brexit scenarios, including a worst case where imports descended into chaos and vital supplies were disrupted. Over the last month, Theresa May’s cabinet has been in deadlock over what solution to the Irish border they will pitch to the European Union at a key Brexit summit at the end of the month. Mainstream media have suggested that Brexit Secretary David Davis is drawing up a 10 mile-wide buffer zone, dubbed “Max Fac 2”, as a possible third solution to break said deadlock. This morning, Markit UK Construction Purchasing Managers Index was released with no change from April’s reading of 52.5.

EUR. The euro ended last week on the back foot against most major currencies on Friday after a mixed and volatile week. In Spain, the vote of no confidence against Prime Minister Mariano Rajoy passed through Parliament, which made Pedro Sanchez of the socialist PSOE party the new Prime Minister. If Italian 2 year government bond yields can be considered as a barometer for how markets view political developments in Italy, then this morning bears good news as 2-year yields on Italian government bonds are down more than 20 basis points. The new Italian coalition seems to have moderated its stance somewhat and now expresses criticism of the European Union as opposed to a desire for withdrawal. The topic of Italy leaving the Eurozone seems to be off the table for now, however, the possibility still remains given the potential for a worsening of Italy’s fiscal balance. Apart from a panel discussion with Mario Draghi on Tuesday, the economic calendar is rather light this week, which puts political developments in Spain and Italy firmly in the spotlight.

USD. Last week the greenback made headway on the Nordic currencies and JPY, whilst losing out to the rest of the G10 currencies, with the DXY composite index posting weekly gains for the seventh week in a row. The latest bout of trade talks with China has ended without a breakthrough, with mainstream media focusing on the increasing likelihood of a trade war, as US Commerce Secretary Wilbur Ross seeks for deals on agriculture and energy to reduce the US trade deficit. It is less than a week until the G7 summit in Quebec, with US Treasury Secretary Steve Mnuchin facing criticism over the US imposition of steel and aluminium tariffs on main trade partners such as the EU. The data calendar looks thin this week for the dollar, with the markets mainly focusing on the development of trade tensions.

CAD. The loonie extended its gains throughout the week against the dollar on Friday, however, Friday’s gains were relatively small. G7 finance chiefs issued a rare disapproval of the US trade actions over the weekend, with French Finance Minister Bruno Le Maire labelling the group of seven “more a G6 plus one”, ahead of this week’s G7 summit. Canadian Prime Minister, Justin Trudeau, described US tariffs as “insulting” when speaking to NBC on Sunday. Disapproval of the US’s imposition of Steel and Aluminium tariffs following stalling NAFTA negotiations have been well voiced, with further concerns on tariffs over global growth expected to be directed at Donald Trump later this week. The only data release of note this week for the loonie is the release of the Unemployment rate on Friday.

UK news

  • Wall Street Journal: Trade Tensions Intensify as Allies Rebuke U.S., Testing Trump Ahead of G-7. The Trump administration showed no sign of backing down from restrictive tariffs in the face of pushback from allies and China over the weekend, isolating the U.S. and complicating the president’s meeting later this week with leaders of Washington’s staunchest partners.
  • Bloomberg: Brexit Is Back: Here’s Where Things Stand. Brexit is back this week as lawmakers return from their recess. U.K. Prime Minister Theresa May has some important decisions to make on what kind of future customs relationship she will formally pitch to the European Union ahead of a key summit at the end of the month.
  • Reuters: UK builders hold on to modest recovery, Brexit worries weigh. Britain’s construction industry in May maintained its modest recovery from a hit during the snowy start to 2018, but worries about Brexit were causing some projects to be put on hold, a survey showed on Monday.

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